Update Newsletter: Fall 2011

From the Director

Bob Hunt, Vice President & Director

As you will see in this edition of Update, 2011 has been an extremely busy year and a year of change for the Payment Cards Center. One of our most valued staff members, Gayle Griffith, has retired, but not before a new member of the team, Stephen Pipito, was hired and acclimated to the challenging job of supporting our efforts. Also, we would like to wish Philip Keitel success in his new role as part of the Bank’s Legal Department. His legal training will be missed in the PCC. At the same time, we are pleased to announce the addition of a new industry specialist, Dubravka Ritter,1 to the center’s staff. After receiving an M.A. in economics from the University of Toronto, Dubravka spent four years with Charles River Associates before joining us in May. We continue to recruit additional industry specialists, so please spread the word.

Bob Hunt

The center has published five new discussion papers since the last edition of Update. These papers are summarized later, but the range of topics covered is worth pointing out: the application of payment cards to commercial payments and small business credit; a review of the many ways in which financially distressed consumers can renegotiate their unsecured debts and the policy issues these options raise; the ongoing evolution toward acceptance of general-purpose payment cards for travel on the nation’s transit systems; a summary of last year’s conference on the development and regulation of the market for prepaid cards; and an examination of insolvency risk in the prepaid card market and how those risks are mitigated.

In addition to the work by the center’s staff, several other departments at the Philadelphia Fed are engaged in research on the markets for consumer credit and payments. Many of these studies appear in the Research Department’s Working Paper series. In the first nine months of this year, 12 new articles on these topics have been added to the Working Paper series.2 Two of those papers are co-written by PCC visiting scholars. Mike Staten, together with John Barron, has written a paper examining whether the means of conducting credit counseling (face-to-face, over the phone, or via the Internet) affects consumers’ credit scores a year or more later. Jon Zinman, together with Victor Stango, has written a paper that investigates whether consumers’ propensity to incur overdrafts on their checking accounts is influenced by limited attention. Space precludes me from describing all the interesting papers being published at the Philadelphia Fed. But an excellent example is a Working Paper, “Rising Indebtedness and Temptation: A Welfare Analysis,” by Makoto Nakajima. In this paper, Makoto applies calibration techniques commonly used in macroeconomics to examine the consequences of changes in lending markets when a portion of consumers suffer from self-control problems.

In addition to the Working Paper series, Marvin Smith of our Community Development Studies and Education Department, together with Susan Wachter of the Wharton School, published an edited volume of articles under the title “The American Mortgage System: Crisis and Reform.”3

This year has also been a busy one for PCC programming. In July, we hosted a conference on the various ways in which state and federal governments interact with the payment card system. This event, organized by Susan Herbst-Murphy, is described later in the new Center Stage column of Update. In September, we held our sixth biennial research conference on Recent Developments in Consumer Credit and Payments.4 This event was co-organized with Ronel Elul5 and Mitchell Berlin6 of our Research Department and featured seven of the best recent academic papers on these topics. These papers examined questions such as:

Can formal models of payment choice be used to assess how consumers will respond to a variety of regulatory interventions?

Are consumers who've had some smudges on their credit record systematically riskier than other consumers? If so, by how much?

Do unanticipated income tax rebates temporarily increase the bankruptcy filing rate because the funds are used to pay filing costs?

How long must consumers who file for bankruptcy wait before being offered a new credit card and what terms will they be offered?

Does negative home equity interfere with labor markets because some consumers are unable to move to new jobs?

Is there a feedback effect between liquidity in mortgage funding markets and home prices?

Does adjusting certain underwriting or collection features of mortgages change mortgage default rates and the homeownership rate?

In addition, we’ve hosted two workshops on topics related to prepaid cards. The first examined how the risk of insolvency is managed in open-loop prepaid card programs (the summary of this workshop is described later in this issue of Update). The second examined the trend toward adoption of general-purpose payment cards by transit agencies, as seen through the experience of the Ready Credit Corporation, a provider of transit-based and general-purpose open-loop prepaid cards. A summary of that workshop is in process.

In addition to organizing our own events, PCC staff have been busy participating in workshops and conferences sponsored by the industry, universities, and our partners in the Federal Reserve System. You may have met me or one of the industry specialists at any one of 21 events in 2011. In all, PCC staff have made more than 14 presentations in the first nine months of this year. This outreach and interaction with colleagues is a priority for the center because it is an important way for us to keep abreast of rapidly changing developments in these markets.

Finally, I would be remiss if I did not point out that this has also been an active year for regulatory developments affecting the markets for consumer credit and payments. The year 2011 marked the birth of the Consumer Financial Protection Bureau and many other changes introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203). One of the most notable regulations established under this act places limits on interchange fees received by large bank debit card issuers (with assets of $10 billion or more) and introduces a number of other changes that will influence how debit card transactions are routed over payment networks. The effects of these and many other recent regulations are likely topics of future research at the Payment Cards Center.